What does the future hold for savings interest?

POSTED: 6th August 2014

IN: Personal News

Share:

For the past five years, British consumers have lived in an era of record-low interest rates, which has brought both benefits and drawbacks. Low interest has made borrowing cheaper, providing a significant advantage for mortgage holders, but savers have received lower returns from their accounts.

For the past five years, British consumers have lived in an era of record-low interest rates, which has brought both benefits and drawbacks. Low interest has made borrowing cheaper, providing a significant advantage for mortgage holders, but savers have received lower returns from their accounts.

One of the main reasons the Bank of England (BoE) decided to cut the base interest rate to an unprecedented low of 0.5 per cent in March 2009 was to reduce the cost of borrowing for banks and consequently consumers, thereby encouraging people to spend to help the battered economy back to its feet.

Five years on, Britain has returned to a state of economic growth and the BoE's Monetary Policy Committee is expected to announce an interest rate rise in the near future. After years of low interest rates, can consumers finally expect better returns on their savings?

How big a hit have savers taken?

There have been varying estimates on the financial impact that five years of a 0.5 per cent base interest rate has had on savers.

Campaign group Save Our Savers calculated that people with money invested in savings accounts have lost out on a collective total of £326 billion since March 2009, as a result of low rates of return and high inflation.

Simon Rose, a spokesman for the group, said the low interest rate environment has "savaged" the nation's savings and has also increased dependency on debt.

He added: "The Bank of England has been incredibly short-sighted in persisting with its low interest rate policy for so long."

Other estimates were less extreme, with consultancy group McKinsey calculating that savers have lost about £65 billion in interest payments as a result of low rates, financial website This is Money reported.

Despite the low returns on offer, one of the big lessons that many consumers appear to have learned from the recession is the importance of saving money.

Data from the Office for National Statistics showed that the amount people were saving, as a proportion of their total monthly income, increased from 0.2 per cent at the start of 2008 to eight per cent by 2009. In 2013, the year that saw the economy return to consistent growth, workers were still putting away 5.2 per cent of their monthly earnings.

How big a rise in interest can we expect?

An interest rate rise is inevitable at some point in the near future, but savers should not expect a drastic increase that will have an immediately transformative effect on their investment returns.

Savings account rates will improve as the base rate goes up, but the BoE has been keen to stress that any increases will be implemented gradually.

While there have been calls for interest rates to be raised as soon as possible, the International Monetary Fund (IMF) has advised that the rate should be kept relatively low for now, with the option of hikes if necessary to prevent unsustainable growth in the housing market.

The IMF's latest report on the UK also noted that "prospects are promising" for the economy. "Headwinds that previously held back the economy - including adverse credit conditions and diminished confidence - have eased," the organisation said. "There are signs that demand is becoming more balanced, with growth in business investment now ahead of private consumption. Employment growth has remained strong. Despite this, inflation has been contained."

Taking matters into your own hands

Rather than waiting for wider increases in monetary policy to deliver a boost in your interest returns, conduct a close examination of your financial arrangements and make sure you are gaining the maximum possible benefit from your investments.

One trap that consumers should be very careful to avoid is staying with one provider out of habit, when more attractive offers are available elsewhere.

A recent investigation by the Financial Conduct Authority found that long-term savers who have remained loyal to one company were typically earning less than half the amount of interest being paid to new customers.

The findings showed that about a third of UK savings are in old accounts paying uncompetitive rates of interest. Over £100 billion is invested in easy-access products opened more than five years ago, with an additional £60 billion in accounts opened over two years ago.

The financial services regulator revealed that it is considering intervening in the situation, to ensure that the millions of customers with poor-paying accounts receive better interest returns.

One of the best ways of keeping your own financial situation in a healthy state is by doing regular research and seeing what alternatives are available in the current market. If you think you could be earning higher returns from your savings, it might be worth switching to another provider.

The content published on this website is intended to provide information only. The reader should seek advice from experts on the subject matter and independently verify the accuracy and relevance of any information provided here before relying upon it or using it for any reason. You can view our terms and conditions here.